When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within MeridianLink (NYSE:MLNK), we weren't too hopeful.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for MeridianLink, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.013 = US$12m ÷ (US$961m - US$57m) (Based on the trailing twelve months to December 2024).

Thus, MeridianLink has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Software industry average of 9.7%.

View our latest analysis for MeridianLink

In the above chart we have measured MeridianLink's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for MeridianLink .

So How Is MeridianLink's ROCE Trending?

We are a bit worried about the trend of returns on capital at MeridianLink. Unfortunately the returns on capital have diminished from the 2.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect MeridianLink to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that MeridianLink is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last three years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you're still interested in MeridianLink it's worth checking out our FREE intrinsic value approximation for MLNK to see if it's trading at an attractive price in other respects.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.